Reference no: EM131094375
Economics 450 - Labor Economics Questions
Q1. According to Current Population Survey data, the median weekly earnings for full-time adult workers in 1984 were as follows: Men, $425; Women, $282. The corresponding figures in 1979 were: Men, $310; Women, $196. The Consumer Price Index increased from 217.4 to 311.1 over this period.
One might conclude from these figures that sex discrimination was worse in 1984 than in 1979 (for example, the difference in weekly wages grew from $114 in 1979 to $143 in 1983). Criticize this conclusion (you may argue for it, or against it, or both) in light of what you have learned about the principles of wage determination, and about trends in the U.S. labor market.
Q2. (a) Suppose that all workers in the US economy had the same innate abilities, and the same capacities to acquire skills through training. Suppose also that everyone could borrow and lend money at the same interest rate. Would grave-diggers then earn higher wages than doctors?
(b) Suppose that at any given wage rate the market demand for workers is greater in Hawaii than in Alaska. Suppose also that all workers have identical preferences and abilities. Will the equilibrium wage in Alaska then be higher than in Hawaii? Explain.
Q3. (a) Review, very briefly, the long-term trends in hours worked, labor-force participation and the real wage in the US economy. Explain how these trends may be related through income and substitution effects.
(b) According to the "Laffer Curve", a cut in income-tax rates may lead to an increase in government tax revenues, because workers have an incentive to work more when their take-home pay increases. Analyze this theory, using your answer to part (a).
Q4. (a) A union representing 400 workers faces a labor demand curve given by
w = 500 - L
where L is the number of workers employed, and w is the weekly wage, measured in dollars. What wage rate should the union set in order to maximize the total wage income of all of its members?
(b) Now suppose that unemployment benefits of $100 per week become available to those workers who are not hired at the union wage. What wage rate should the union set in order to maximize total income (including both wage income and unemployment benefits)?
Q5. College education is heavily subsidized by federal and state governments. Write a short essay giving economic arguments for or against these subidies.
Q6. A worker chooses to work X hours per week, at a wage of $9 per hour. An overtime rate of $12 per hour is then offered, for hours in excess of 40; in this situation, the worker chooses to work Y hours per week. Finally, the $12 wage is offered for all hours worked, and the worker chooses to work Z hours per week. What can be said about the relationship between X, Y and Z (for example, is Y greater than Z)? Explain your answer in terms of income and substitution effects.
Q7. The real internal rate of return, after tax, on investments in college education is in the range 5-10%. Suppose that the government eliminated all grants and subsidized loans for college students, and instead bought shares in students' future earnings. For example, the government might buy a 1% share for $5,000, subsequently collecting a special tax of 1% on all earnings after the student graduates (in addition to the ordinary income tax). Write a short essay describing some of the economic arguments for or against a policy of this sort.
Q8. In 1979, workers paid Social Security taxes equal to 6.13% of gross earnings, up to an earnings "ceiling" of $22,900 for the year (so that the tax could not exceed $1403.77). Employers paid taxes for each worker equal to the amount paid by the worker. These taxes are still in effect for 1985, but the tax rate is now 7.05% for both the worker and the employer, and the earnings ceiling is $39,600.
Analyze the effects of these tax changes on the supply of labor.
Q9. (a) Explain why a profit-maximizing monopsonist will generally pay different wages to men and women, even if men and women are equally productive.
(b) A monopsonist faces the labor supply curves
Wm = (1/40)Lm + 80 , and Wf = (1/10)Lf - 20 ,
where Wm and Wf are the weekly wages of men and women, respectively, and Lm and Lf are the numbers of men and women hired. Men and women are equally productive, and the production function is
Q = 30 L - .001 L2,
where Q is total output, and L is the total number of workers (including both men and women). The monopsonist sells this output at a fixed price of $10 per unit.
What wage rates should the monopsonist offer to men and to women, in order to maximize profit?
Q10. Consider a primitive economy in which there are two kinds of jobs, hunting and fishing. Suppose the marginal product of hunters is given by the equation
h = 200 - H,
where H is the total number of hunters in the economy, and h is their marginal product, measured in pounds of food. The marginal product of fishermen is given by the equation f = 200 - F , where F is the total number of fishermen in the economy, and f is their marginal product, also measured in pounds of food.
There are 210 workers in the economy, 147 whites and 63 blacks, all equally productive in both fishing and hunting. All workers prefer fishing to hunting, but preferences differ across individuals: the distribution of equalizing differences ranges evenly from 0 to 21. For example, if fishermen earned 2 pounds less than hunters, 20 people (2/21 of the total) would choose hunting, including 14 whites and 6 blacks.
(a) If the economy is competitively organized, how many people will be fishermen, and how many will be hunters? What will the wage differential be, in equilibrium?
(b) Now suppose that blacks are not allowed to hunt. How will this affect the equilibrium? What will happen to the average wages of whites and blacks?
Q11. Hicks summarized his views on collective bargaining and strikes as follows:
"Any means which enables either side to appreciate better the position of the other will make settlement easier; adequate knowledge will always make a settlement possible."
Discuss critically the argument which led Hicks to this conclusion.
Q12. A coal-mining company is the only employer in town, and faces this supply curve for labor:
w = 48 + (72/2000) L,
where w is the daily wage, in dollars, and L is the number of workers employed. The company faces this demand curve for coal:
p = 60 - (9/4000) Q,
where p is the price of coal, per ton, and Q is the number of tons sold per day. Coal-miners produce 8 tons of coal each, per day, regardless of the number hired. The mining company maximizes profit.
(a) How many workers will be hired, and how much profit will be made?
(b) Suppose a union is formed, which sets a wage of $120 per day. At this wage, according to the supply curve given above, 2000 miners are willing to work, and the company is free to hire as many of these as it wants. How many will be hired, and how much profit will be made?
Q13. Analyze the following assertions (state whether they are true, false or uncertain, and explain why):
"If all prices and wage rates increase by 10%, the supply of labor will not change. Thus inflation does not affect labor supply."
(a) "Employers commonly offer an overtime premium to induce workers to supply more labor. This proves that the labor supply curve is not backward bending."
(b) "The reduction in the workweek during the period 1900-1940 is often explained as a response to increasing real wages. This explanation must be wrong, because real wages have increased a great deal since 1940, and the workweek has hardly changed at all."
Q14. Prove that if a profit-maximizing firm takes the wage as given, its demand curve for labor must slope down.
Q15. (a) "If the local hamburger joint is paying its workers the minimum wage of $3.35 per hour, these workers must have a marginal revenue product of $3.35. Therefore, if the minimum wage is increased, all of these workers will be laid off." Analyze this statement.
(b) Explain what the following terms mean: marginal revenue, marginal product of labor, marginal labor cost and marginal cost. What relationships among these must hold for a profit-maximizing firm?
Q16. Fred Bloggs chooses between leisure and consumption. The utility derived from any combination of leisure and consumption is given by the formula:
u = LC - 88C
where u is utility, L is the number of leisure hours per week, and C is the number of dollars spent on consumption per week. Fred can work as many hours as he wishes each week, at a wage of $4 per hour. He has no other source of income.
(a) Using graph paper or a computer, draw a graph showing indifference curves for u = 6000, u = 6400, and u = 6800. Measure the marginal rate of substitution (MRS) at some of the points on these indifference curves.
(b) Draw the budget line on your graph. Pick any three points on the budget line and measure the MRS at these points.
(c) By trial and error (or by other means) find the utility maximizing combination of consumption and leisure. (Hint: Starting from your answers to part (b) try to find a sequence of points which give increasing utility, guess where this sequence will lead, and verify that your guess is at least approximately correct.)
(d) Suppose the wage increases to $8 per hour. Would Fred choose to supply more labor at $8 than at $4?
(e) Now, instead of an increase in the straight-time wage, suppose Fred is offered overtime at $8 per hour after working 40 hours at $4 per hour. Will he accept the overtime, and, if so, how many hours will he choose to work?
Q17. A coal-mining company is the only employer in town, and faces this supply curve for labor:
w = 16 + (48/2000) L,
where w is the daily wage, in dollars, and L is the number of workers employed. (For example, at $40, the supply is 1000). The company faces this demand curve for coal:
p = 40 - (3/2000) Q,
where p is the price of coal, per ton, and Q is the number of tons sold per day. Coal-miners produce 4 tons of coal each, per day, regardless of the number hired. The mining company maximizes profit.
(a) How many workers will be hired, and how much profit will be made?
(b) Suppose a union is formed, and it sets a wage of $100 per day. At this wage, according to the supply curve given above, 3500 miners are willing to work, and the company is free to hire as many of these as it wants. How many will be hired, and how much profit will be made?
Q18. A profit-maximizing firm produces one product, for which it faces a downward sloping demand curve. The firm uses two inputs, capital and labor, and it is a price-taker in the labor market but not in the capital market. Prove that the firm's demand curve for labor is not upward sloping.
Q19. (a) Explain the concept of "equalizing differences" in wages.
(b) It has been recently argued that the University of Iowa can't attract or retain good faculty by offering higher salaries, because anyone who is attracted by high salaries will go to work in industry. It is true that many faculty members could get jobs in industry paying at least 50% more than Iowa pays.
Is this argument (that the faculty supply curve is completely inelastic) valid? Explain carefully.
Q20. "In the real world, the work week is determined by the firm, not by the worker. Therefore the decrease over time in the average work week cannot be explained as a movement along the labor supply curve." Discuss.
Q21. "If all or most of the returns to education were in fact due to ability, there would be no substantial tendency for high-ability people to invest in education. But in fact high-ability people stay in school longer than average. So schooling must have a direct influence on productivity." Evaluate this statement.
Q22. (a) Consider a price-taking firm which uses two inputs, labor and energy, to produce a single output. Discuss the effect of a rise in energy prices on the firm's demand for labor.
(b) If the output price rises at the same rate as the price of energy, while the wage stays unchanged, how is labor demand affected?
Q23. Define economic discrimination. Discuss the theory that economic discrimination cannot co-exist with even a moderate degree of competition in a market economy.
Q24. Analyze the conditions under which unions can raise employment and/or wages. Compare the case of a competitive industry with the case of monopsony.
Q25. Suppose that Social Security is financed by a tax on wages which works as follows: for every $100 paid in wages, up to a maximum of $15,300 per annum, the employer and the employee must each pay $5.85 in tax. Earnings beyond $15,300 are not taxed.
(a) Analyze the income and substitution effects of this tax on labor supply
(b) Suppose the tax were levied entirely on the employer at the rate of $11.70 per $100 (i.e., 2 x $5.85). How would this affect the equilibrium wage and quantity of labor?
Q26. (a) In real world labor markets, jobs differ greatly in location, working conditions and other nonpecuniary characteristics. If all workers were identical in every respect, would the equilibrium wage be the same in every job? Explain.
(b) Analyze the following assertion:
"Suppose the market demand curves for labor in Hawaii and Alaska happen to be identical. Suppose also that all workers are identical. Then in equilibrium the number of workers employed in Alaska will be exactly equal to the number employed in Hawaii."
Q27. Major league baseball clubs generally have a local monopoly. The marginal cost of filling a seat at the ballpark is approximately zero. The typical fan buys hot dogs, peanuts, beer and souvenirs at concession stands in the ballpark, and the club receives the profits on these sales. The demand curve for seats is downward sloping.
(a) Show, using a diagram, how the club would determine the profit-maximizing ticket price.
(b) Analyze the effect of an increase in player salaries on the profit-maximizing ticket price.
Q28. A monopolist faces the demand curve
P = 60 - .4Q
where Q is the annual quantity sold, and P is measured in dollars. Labor is the only input, and the labor supply curve is perfectly elastic at a wage of $2/hr. Using L to represent total hours worked, the production function is
Q = [10 L-5000]1/2
(a) Find the profit-maximizing price and quantity.
(b) Suppose a price ceiling of $35 is imposed. What is the new profit maximizing plan, and how much profit is made?
Q29. In the case of each of the following, indicate whether the statement is true, false or uncertain, and explain why. Points are awarded entirely on the basis of your explanation.
(a) A rise in the wage rate implies a rise in the firm's average cost curve.
(b) A movie theater which sets admission prices in such a way that many seats remain empty cannot be maximizing profits.
(c) If all prices rise by 15%, and the wage rate also rises by 15%, then the supply of labor will not change.
Q30. (a) In a competitive economy what determines the distribution of output between the various factors of production?
(b) An increase in the capital stock, ceteris paribus, will increase the total income of labor. Explain.
Q31. Discuss the conditions under which unemployment is a productive activity.
Q32. "If workers and management always acted rationally, and if each side always understood clearly the intentions of the other, then a strike would never occur." Discuss.
Q33. "The Unemployment Insurance system tends to raise the unemployment rate.
(a) Is this true? Explain.
(b) Given your answer to (a) discuss the economic efficiency of the UI system. (For example, if UI increases unemployment, is this necessarily bad?)
Q34. (a) Explain what is meant by the "elasticity of substitution" between capital and labor in production.
(b) Show that an increase in the amount of capital per worker will increase labor's share of total output if the elasticity of substitution is less than unity.
Q35. (a) Consider a coal-mining firm which uses just one input, labor. Suppose there are constant returns to scale (i.e., the output of the mine is proportional to the total number of hours worked). The demand curve is such that 100 tons per day can be sold at $20 per ton and each increase of $1 per ton reduces demand by 5 tons.
(b) If each miner produces 1/2 ton per hour and labor supply is perfectly elastic at a wage of $8 per hour, find the profit-maximizing rate of output per day, and the number of miners hired (assume an eight-hour day).
(c) Suppose the mine workers' union demands that new safety equipment be installed in the mine, which would cost $100 per day in interest and depreciation charges. The firm responds that this would not be in the best interest of the miners, since the additional cost would cause the firm to reduce employment. What would the profit maximizing level of employment actually be, if the safety equipment were installed?
(d) If the firm were made to pay an additional $50 per day per worker employed into the union pension fund, what would be the effect on employment?
36. Consider a simple economy in which there are just two occupations, say coal mining and auto repair. There are 50,000 workers; 35,000 are white, 15,000 are black. All workers have identical abilities.
Suppose that the mining and auto repair industries are perfectly competitive, and they just happen to have identical labor demand curves, given by
w = 40 - L
where w is the hourly wage (net of any training costs borne by workers), and L is the number of workers employed in the industry, measured in thousands.
Workers tend to prefer auto repair work to coal mining; the extent of this preference varies from one worker to another, but there is no systematic variation by race. The distribution of equalizing differences over workers is uniform between 0 and $10. (For example, if the wage differential is $3 per hour, 30% of the workers choose mining and 70% choose auto repair).
(a) Find the equilibrium wage differential and occupational distribution for this economy.
(b) Now suppose that coal mining firms will not hire black workers, at any wage, while auto repair firms do not discriminate. The demand price for white workers in coal mining is the same as before. Find the new equilibrium wage differentials, by occupation and by race, and also the new occupational distribution.
Q37. At a certain university the number of students wishing to attend substantially exceeds the available number of places. The most important criteria used to allocate places are money (high tuition fees) and intellectual ability (high-school records, admission test scores). A philanthropist offers a sum of money to the university, the yield on which, at the market rate of interest, will equal total annual tuition revenue, if the university agrees to eliminate money as a criterion for admission. Assume that, at a tuition price of zero, 100,000 students would apply for 1,300 places. The university then considers three schemes for admitting students (assume initially that admission rights are not transferable):
I. Admission based strictly on test scores;
II. Admission based on a lottery;
III. Potential students must form a line in front of the Admissions Office. At 9:00 a.m. on April l, each year, the first 1,300 students are admitted.
(a) Would you recommend I or III over II on grounds of economic efficiency? Explain your answer carefully.
(b) Now assume admission rights can be transferred. In this way a student who has won a place can sell it to the highest bidder. How would this change your answer to part a)?
Q38. "The existence of premium wage rates for overtime proves that the labor supply curve is not backward bending." Is this true or not? Explain.
Q39. (a) Given census data on the earnings of persons in a given year, explain how the rate of return to college education may be estimated.
(b) It is probably true that the quality of education has been rising over time, so that in a given year, 25 year-old graduates are better educated, on the average, than 45-year-old college graduates. If this is so, does the method of estimation which you have described in part a. tend to understate the true rate of return to college education? Explain.
Q40. (a) If it is expensive for a firm to hire new workers, the wage will differ from the marginal revenue product of labor, even under competitive conditions. Explain this.
(b) How do hiring costs affect the firm's demand for overtime when there are fluctuations in demand for the firm's product?
Q41. Houses are allocated to families and individuals on the basis of willingness and ability to pay. Moreover, the number of houses built is determined by the profitability of building: a comparison of market price with the cost of production.
Analyze the implications of a similar price mechanism for allocating places in universities, and for controlling the number of places supplied.
Q42. A worker chooses to work 40 hours a week at a wage of $9 per hour.
(a) How will the worker react to an overtime rate of $12 for hours in excess of 40?
(b) How will the worker react to an increase in the wage rate to $12 for all hours worked?
(c) Compare your answers to a) and b), paying particular attention to the income and substitution effects in each case.
Q43. Explain Oi's theory that fluctuations in labor demand will be greatest for those workers with the lowest degree of fixity.
Q44. An industry in a particular country consists of 100 identical firms. It is impossible to establish additional firms since suitable sites for plants do not exist. The price of the product is $10, set in a competitive world market. Each firm has a production function given by
Q = 30L - 0.1L2, where Q is output and L is labor.
Male and female workers are equally productive and sell their labor as perfect competitors according to
Wm = .025 Lm + 80 , Wf = .10 Lf - 20
where the subscripts refer to male and female, and Wm and Wf are the respective weekly wages.
(a) Find Wm ,Wf, Lm, Lf and Q.
(b) The firms combine to form a single monopsony which is able to practice wage discrimination on grounds of sex. Find the new levels of Wm ,Wf, Lm, Lf and Q.
45. (a) Show that a profit-maximizing firm will never hire more labor, in the short run or in the long run, when the wage rate rises.
(b) Which is more elastic, the short run or the long run response? Explain your answer.
(c) How does the introduction of fixed labor costs complicate this analysis?
46. The Upstream Brewery has a monopoly on beer sales in the town of Boring View, Nebraska. The demand curve for beer is
P = 300 - .04 B,
where B is the number of six-packs of beer sold per hour, and P is the price of a six-pack, in cents. The brewery is the only employer in town, and the supply curve of labor is
W = .08 L + 60,
where L is the number of workers, and W is the hourly wage, in cents. Each worker produces one six-pack of beer per hour. How many workers should the brewery hire, to maximize profit? What wage will it pay, and how much will it charge for beer?
47. It is often argued that unemployed workers spend their time looking for the best available job, and that this is analogous to time spent investing in education.
(a) If you were asked to calculate the rate of return to investment in job search, what information would you need, and how would you make the calculation?
(b) Is it reasonable to suppose that the amount of time spent on job search would be about right if no unemployment benefits were available from public funds?
48. A profit-maximizing firm uses two inputs, energy and labor, to make a single product. The firm faces perfectly elastic supply curves for labor and energy, and a perfectly elastic demand curve for its product--it takes all prices as given.
(a) Suppose that all prices rise by 20% (including the wage rate, the price of energy, and the price of the firm's product). How will the firm's demand for labor be affected?
(b) If the wage rate did not change, while both the price of energy and the product price increased by 20%, how would the firm's demand for labor be affected?
49. A training project costs $34,000 today. If you are trained, you will get returns of $12,100 a year from today and $29,282 three years from today.
(a) What is the approximate internal rate of return on this project?
(b) Suppose you can borrow and lend as much money as you wish at an interest rate of 10%. Would you invest $34,000 in this project?
50. Fred Bloggs earns $5 an hour before taxes. Income taxes are proportional to gross income, and the tax rate is 20%, so take-home pay is $4 per hour. In this situation Fred chooses a 40-hour workweek.
The government offers to abolish the income tax if workers, in return, will work eight hours a week for the government, without pay.
(a) Will Fred accept this offer?
(b) If he accepts or is forced to accept the offer, how many hours a week will he work?.
51. (a) Consider a profit-maximizing firm that rents land and hires labor to produce corn. The firm is a price-taker in all markets. If the annual rental on land increases, what will be the effect on the firm's demand for labor?
(b) If the price of corn, and the rental on land, both fall by 10%, while the going wage stays the same, how is labor demand affected?
52. Consider a primitive economy with two kinds of jobs, dragon slaying and cave decorating. Suppose the marginal product of slayers is s=600-S, where S is the number of slayers in the economy, and s is the value of their marginal product, in dollars. The marginal product of decorators is given by the equation c=600-C, where C is the number of decorators in the economy, and c is the value of their marginal product. There are 630 workers in the economy, all equally productive in decorating and slaying. All workers prefer decorating to slaying.
a. Suppose all workers agree that a difference of $30 is just enough to offset their preference for decorating. If the economy is competitively organized, how many people will be cave decorators, and how many will be slayers? What will the wage differential be, in equilibrium?
b. Now suppose that preferences differ across individuals: the distribution of equalizing differences ranges evenly from 0 to $63. For example, if s-c=$3, 30 people (3/63 of the total) choose slaying. How will this change the equilibrium?
53. Analyze the following assertions (state whether they are true, false or uncertain, and explain why):
a. "A rise in the wage rate implies a rise in the firm's marginal cost curve."
b. "If non-labor income rises by 30% in nominal terms, while all prices and wages also rise by 30%, the supply of labor will increase if the substitution effect is greater than the income effect."
c. "In the real world, the workweek is determined by the firm, not by the worker. Therefore the decrease over time in the average work week cannot be explained as a movement along the labor supply curve."
d. "An increase in the rate of income tax causes workers to supply less labor."
e. "Discrimination cannot survive in competitive markets."
f. "If all workers were identical in every respect, the equilibrium wage would be the same in every job."
g. "If the wage rate for skilled workers is twice the wage for unskilled workers then a cost-minimizing firm will use fewer skilled than unskilled workers to produce any given output."
54. Skilled workers are more plentiful in the U.S. than in other countries (for example, the proportion of the labor force with a college degree is relatively high). This means that a reduction in barriers to international trade leads to more wage inequality in the U.S. Explain why.